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The tax man cometh [2005 thread]

Jimster

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After reading the thread on "TS are a good investment", I got to thinking hmmmm. If we are talking investments here, we are talking taxable events. I'm just curious how this is handled by different tuggers? Do some people depreciate their TS ownerships if they are for investment? As i recall there is no 1099 B with a TS sale (I could be wrong). Do these get reported to the IRS? How do people handle MF, Taxes and special assessments? There is probably a bean counter out there that has some answers but I'm also interested in other peoples ideas. I once talked to a guy in a timeshare presentation (they'll tell you anything), that each time you went for example to Orlando to visit your investment, that all expenses were deductible as business expenses. Well, let me throw it open because I know there are alot of different practices and opinions.
 

Jya-Ning

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Tax part you can file if you use itemize (include in local / state property tax). For MF and vacation cost, you need to be in the business of renting them out, then you can take it. There is also the day of usage. If you used it mainly for vacation, you can not file them.

Jya-Ning
 

Dave M

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Expanding on the somewhat outdated info in my tax article in the TUG Advice section, here's more than you ever wanted to know....

Deductible Items
Unless you rent your timeshare to others, you likely will have no deductible amounts related to the timeshare. However, if the property taxes applicable to your unit are billed separately to you (such as in California), those are deductible. They are also deductible if your resort shows them as a separate item on your MF billing. However, if you have to seek out the amount applicable to your unit by examining the financial statements, the taxes are not deductible.

A few owners can deduct the interest expense on a timeshare loan. The interest is deductible only if the loan is secured by the timeshare as a mortgage and you deduct no other mortgage interest except on your primary home. Note that most timeshare loans don't qualify because they are written as consumer loans rather than as mortgages.

Forget about trying to use your timeshare in your business to get depreciation, MFs and other deductions. There is a rule in the tax law that prohibits any business deduction pertaining to an "entertainment facility". Timeshares fit into that category. There are a very few narrow exceptions to this rule.

Sale of a Timeshare
If you sell a timeshare and have a gain, it's taxable.

If you sell a timeshare and have a loss, it's not deductible (with one exception). Suppose you say it's an investment. Can't you then deduct the loss, just as you would with a loss on the sale of stock? No, not if you use the timeshare yourself, exchange it, or let friends or relatives use it. Even though your intent might be to hold it as an investment, your personal use results in no tax loss being allowed upon sale.

The single exception allowing a loss on sale is if you rent the timeshare regularly. In such a case, the loss on sale is deductible and will normally be deductible as an ordinary loss (it's actually called a Section 1231 loss). Note, however, that your "cost" for determining the loss is the fair market value (resale value) at the date you convert the timeshare to a rental property.

Annual rent
If you rent your timeshare, you can deduct all current expenses, including depreciation, against the rental income. If you have net rental income for the year, it's taxable.

If you have a net rental loss, you cannot deduct the loss. How come?

First, it's certainly legitimate to deduct rental expenses to offset rental income. However, with timeshare rentals, there are some limitations to deducting those expenses if you incur a loss.

Assuming that like most timeshare owners, you typically rent to tenants for one week or less at a time, your rentals don't qualify as a "rental" business. A special section of the Income Tax Regulations prohibits treating your loss as a “rental loss” if the average rental period for a particular tenant is seven days or less.

Even most tax advisors are not aware of this rule. Your tax advisor can review §1.469-1T(e)(3)(ii)(A) of the Temporary Income Tax Regulations. This regulation is also referred to in IRS Letter Ruling #9505002, which gives an indication of the IRS position on this issue as it relates to timeshares, as discussed above.

So what happens to the loss if it's not treated as a rental loss? It falls into the passive activity loss rules of §469 of the Internal Revenue Code. Those rules prohibit deducting such losses except against other passive activity income. Such income is narrowly defined and doesn't include, for example, dividends, interest or other investment income.

Thus, you're pretty much stuck with carrying over such losses to use against positive taxable income from your rental activities in future years. You can also deduct any carryover losses related to a rental property in the year you sell that timeshare.

There are a number of complex rules that could change the result here - including the vacation home rules, rules relating to renting to tenants for longer than one week at a time, etc.

Vacation Home Rules
Wouldn't the vacation home tax rules apply to a rental gain, allowing you to avoid reporting the income, because you rented the property for fewer than 15 days?

The simple answer is that you must report the profit - whether you own one week or a number of weeks. Why? Don't the vacation home rules apply to exempt from income tax income for rentals of less than 15 days? No, the vacation home rules don't apply.

The vacation home rules apply only if you use the "vacation home" for at least 15 days each year for personal purposes. A timeshare can qualify as a vacation home. However, unless you own at least four weeks at a single resort, using at least three of the weeks for personal purposes, you can't take the benefit of excluding the income from renting the fourth week.

Thus, in almost every situation, you must report the profit. You can also offset losses from some rentals against profits on others to minimize your net taxable income, but deducting a net loss is still subject to the rules above.
 

Jimster

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tax

Thanks Dave!
A very thorough answer. I wonder if all of our fellow tuggers out there comply with the tax situation as you explain it? I think its good to revisit this information from time to time.
 

GaryDouglas

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Irs 101

If you rent your timeshare, you can deduct all current expenses, including depreciation, against the rental income. If you have net rental income for the year, it's taxable.

So, for example, if I were to rent out a week for $1,500 and my MF for that week is $1,000, my net taxable gain would be $500? If this is the case, does it require a CPA to fill out the tax forms?
 

JudyS

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Dave M said:
The vacation home rules apply only if you use the "vacation home" for at least 15 days each year for personal purposes. A timeshare can qualify as a vacation home. However, unless you own at least four weeks at a single resort, using at least three of the weeks for personal purposes, you can't take the benefit of excluding the income from renting the fourth week.

As usual, Dave M provides excellant advice!

I just want to add that if one own at a points-based resort, it may not be that hard to stay in one's resort for 15 or more days during a year, and rent some points out, too. Many points-based systems allow borrowing and banking points, as well as getting more nights by staying mid-week or in a smaller unit.
 

Dave M

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GaryDouglas said:
So, for example, if I were to rent out a week for $1,500 and my MF for that week is $1,000, my net taxable gain would be $500? If this is the case, does it require a CPA to fill out the tax forms?
You'll also have a depreciation deduction, advertising costs and perhaps postage and other minor expenses.

How much depreciation? If new, you can base your claimed depreciation expense on your purchase cost. However, if you have previously used your timeshare for personal purposes (including an exchange or use by friends or family), you must base your depreciation on current value, which means resale value.

Assume the amount to use for depreciation is $5,000. The first year's deduction, based on an IRS table, should be 3.485% of that amount, or $174.25.

If you normally prepare your own tax return, you should still be able to do it. Simply get a copy of Schedule E and the related instructions. The net rental income shown on Schedule E, if any, will carry forward to page one of your Form 1040. Better yet, use one of the several easy-to-use computerized tax programs to prepare your return.
 

jme

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Dave for President! Wasn't that a movie?

Then finally, finally, we'll get the budget in order, and stop porkbarrel spending,etc. etc., AND everyone will be happy, happy, happy. I say "Five TIMESHARES in every garage"!!!!!!! Dave, you are right on the money again. Ironically, I just finished my taxes TONIGHT, like 2 hours ago, so I'm now on TUG celebrating---no kidding...... (I always do an extension, and tonite is like Christmas to me----now everything goes to my accountant in the morning!!!!) , and I DID count the timeshare tax expenditure , as I always have.....too bad that's the only deductible part. Dave, I hope everyone knows how valuable you are to many important and technical questions here on TUG, and your service to TUG is quite admirable and much appreciated.......happy to say that I have met you and Sandy, and that you're also my TUG friend!!!!! Take care! Marty (jme) :)
 

GaryDouglas

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Since a recent resale on eBay indicates a current value that is greater than my purchase price, hopefully I could use that in stead. If I do any renting in 2006, I won't have to deal with the tax part until April of '07. Plenty of time to get educated. I can do a test trial using TurboTax next year. Thanks for the info, oh tax guru...
 
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Dave M

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Sorry, Gary. My earlier message was incomplete.

You can never use a depreciable "cost" that exceeeds what you paid. Thus, when you start renting, your basis for determining depreciation is the lower of what you paid or current resale value.
 

Dean

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Nice posts and info Dave, thanks for your well worded and thought out posts.
 

Laurie

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James Rosenberg said:
As i recall there is no 1099 B with a TS sale (I could be wrong).

I once sold a timeshare located in Hawaii and did in fact receive a 1099.

Here's a question: if you sell one at a profit and one at a loss in the same year, can you deduct the amount of the loss from the amount of profit, = less profit?
 

Dave M

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You are correct. A Form 1099 is supposed to be issued if the selling price is $600 or more. However, the correct form is a 1099-S. Those required to issue such forms, don't always do so and don't always use the correct form.

As stated in my first post above, profits from timeshare sales are taxable and losses are not deductible, excepted as noted in that post. Thus, if you sell two timeshares, one at a gain and one at a loss, you should pay tax on the gain without offsetting that gain with the loss on the other sale.
 
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Sale of my timeshare

So I am a lucky one in that I owned my timeshare for 3 years and made a profit. What can I claim? Maintaince fees? Special assessments?
 

Dave M

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I'm not sure if you profited from a sale or profited from a rental. In either case, take look at the tax article in the TUG Advice section and post #4 in this thread for the info that applies to your situation. Then come back and ask for clarification. We will be glad to help.

Assuming you have sold your timeshare, here is one paragraph from the article that might help:
Profit on sale is treated as capital gain, subject to favorable tax rates if owned for more than one year. For gain purposes, your cost is generally your original cost, plus additions for the following items: (1) closing costs incurred when you purchased your timeshare, (2) the portion of your annual maintenance fee (for all years owned) allocated to capital reserves or used specifically for capital improvements (such as a new roof), and (3) any special assessments for capital improvement purposes which you paid. This amount should be reduced by any depreciation expense in years you rented the timeshare.
 
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cindi

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I sold two timeshares last year, and have already received the 1099 S forms.
My question is, can I add in the special assessment I paid? I bought it for $7500 and sold it for $8000, because I added in the special assessment of $460.

That would make the purchase price $7960 and the sale price $8000, which is basically even.

Or do I have to list the purchase price at the orignal $7500, disregarding the special assessment?

Thanks in advance, Dave, for all the excellent advice you have given us all in the past as well as the present! :clap:
 

bsilly

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Confused

If I bought my timeshare for $20000 in 2000 and sold it last year for $14000--obviously with maintenance fees and special assessments, I sold it at a loss. Is the $14000 treated as income?
 

Dave M

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bsilly -

As discussed in the TUG tax article linked above, you will have a gain or loss on the sale - your selling price less your cost and any selling costs. If it's a gain, that net gain is taxable. If it's a net loss, it's not deductible, except in certain situations involving a timeshare that has been frequently rented.

The confusion is that the $14,000 must be reported on the tax return - on Schedule D. Then that amount is offset by the cost of the timeshare and any selling expenses - on the same line of Schedule D.

If you have ever sold common stocks or shares in a mutual fund, the treatment is almost the same as for a timeshare. In both cases, you report both the proceeds and your cost on Schedule D, paying tax on the net gain, if any. The difference is that losses on stock and mutual funds may generate a deduction, while losses on sales of timeshares will normally not be deductible.
 

short

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Selling TS used for business travel

After reviewing the exchange history of a unit I am planning on selling this year I noted that 4 of 4 exchanges since I bought it have been used for tax deductable business travel.

As such, it would seem logical that the gain or loss both be reportable. Luckily the gain or loss will likely be nominal so tax implications are of little serious concern.

I use timeshares frequently for business travel that require more than a few days stay. I consider timeshares to be the same as hotels. Unfortunately the word timeshare implies a element of personal pleasure just like RV implies its use is always for recreation which is not always true.

Short
 

riber52

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New Question regarding an old thread - tax issues

I own multiple timeshares in the Wyndham universe and have a question about deductability of depreciation in a "points" environment. If I use some of my points to reserve weekends that I rent out and some points for vacations, should I be tracking depreciation on these properties?
Your answers on this topic have been invaluable and I appreciate your time and knowledge on this subject.
Rick

Expanding on the somewhat outdated info in my tax article in the TUG Advice section, here's more than you ever wanted to know....

Annual rent
If you rent your timeshare, you can deduct all current expenses, including depreciation, against the rental income. If you have net rental income for the year, it's taxable.
 

Ridewithme38

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Annual rent
If you rent your timeshare, you can deduct all current expenses, including depreciation, against the rental income. If you have net rental income for the year, it's taxable.

If you have a net rental loss, you cannot deduct the loss. How come?

First, it's certainly legitimate to deduct rental expenses to offset rental income. However, with timeshare rentals, there are some limitations to deducting those expenses if you incur a loss.

Assuming that like most timeshare owners, you typically rent to tenants for one week or less at a time, your rentals don't qualify as a "rental" business. A special section of the Income Tax Regulations prohibits treating your loss as a “rental loss” if the average rental period for a particular tenant is seven days or less.

Even most tax advisors are not aware of this rule. Your tax advisor can review §1.469-1T(e)(3)(ii)(A) of the Temporary Income Tax Regulations. This regulation is also referred to in IRS Letter Ruling #9505002, which gives an indication of the IRS position on this issue as it relates to timeshares, as discussed above.

This is interesting...i wonder how hotels and motels get around this
 

ronparise

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So, for example, if I were to rent out a week for $1,500 and my MF for that week is $1,000, my net taxable gain would be $500? If this is the case, does it require a CPA to fill out the tax forms?

a cpa is never required to fill out a tax form (advisable perhaps), but not required
 

whatsburning

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Instead of paying cash for our last purchase, we took out a home equity loan ao we can deduct the interest...
 

bogey21

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a cpa is never required to fill out a tax form (advisable perhaps), but not required

I have used TurboTax for over 10 years now. It has handled multiple rental properties; my race horses; my partnership interests; my stock transactions; etc., all for less than $100.

George
 
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